Pay-for-Performance Payments Tax Free

Homeowners at risk for defaulting on their mortgages may qualify for pay-for-performance payments under the Home Affordability Modification Plan (HAMP), a program that is part of the Homeowner Affordability and Stability Plan. To encourage timely mortgage payments on principal residences, the plan will reduce the mortgage principal up to $1,000 per year for up to 5 years for eligible homeowners. These homeowners do not receive cash payments; the pay-for-performance payments merely reduce their mortgage balance.

The IRS has ruled that these payments are not includible in the homeowner’s gross income. They do not involve the performance of services. Usually, gross income includes income from whatever source derived. However, there is an exception to this gross income rule for payments for general welfare. Pay-for-performance payments fall under this exception and are not taxable.

Source: Rev. Rul. 2009-19